Americans owed $1.36 trillion in student loans near the end of 2017, according to data from the Federal Reserve Bank of New York.1 Students have taken on this debt for good reason: a bachelor’s degree increased median household earnings by $23,000 in 2014, the New York Fed found in an analysis.2 But if you don’t find the best way to repay your school loans, you could throw away thousands of dollars over the years.
Refinancing your student loans can lower your monthly payment; reduce the total interest you pay over time, help you get out of debt faster, or some combination of these depending on the provider and the terms (three examples are discussed below).
Of course, depending on the kind of student loans you have, refinancing could change some terms of repayment for individual loans and should be investigated before going through the process. So understanding the terms of your student loans and the refinancing possibilities is critical.
There are two types of student loans: federal loans, which are made or guaranteed by the U.S. Department of Education, and private student loans, which come from sources such as banks, credit unions, and online lenders. Federal loans include Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans (for parents of dependent students).
If you’re thinking about refinancing your federal student loans to get a lower interest rate, it’s important to understand the borrower protections you may lose if you refinance with a private lender.
Income-based student loan repayment
If your monthly student loan payment is higher than you can afford because your income is too low, you may be eligible for one of four income-based repayment plans: the Revised Pay As You Earn Repayment Plan (REPAYE Plan), Pay As You Earn Repayment Plan (PAYE Plan), Income-Based Repayment Plan (IBR Plan), or Income-Contingent Repayment Plan (ICR Plan). For example, under PAYE, recent grads can apply to have their student loan payments capped at 10 percent of their discretionary income, according to the U.S. Department of Education.
Direct subsidized loans, also called Stafford loans, are available to undergraduates who demonstrate financial need. If you have one of these college loans, the U.S. Department of Education will pay your loan interest while you’re in school at least half-time, for the first six months after you leave school, or during a period of loan deferment, according to the DoE’s website.
Student loan forgiveness for careers in public service
You may qualify for the Public Service Loan Forgiveness Program if you work full-time for a government or not-for-profit organization or serve full-time in AmeriCorps or the Peace Corps. Once you’ve made 120 payments on your Direct Loans under qualifying repayment plans, which include all of the income-based repayment plans, the rest of your balance may be forgiven if you aren’t in default on your loan.
The Teacher Loan Forgiveness Program may forgive up to $17,500 in federal subsidized or unsubsidized loans (but not PLUS loans) for teachers who work full-time for five consecutive years in a low-income elementary or secondary school or educational service agency.
Deferment and forbearance
Deferment lets you postpone payments on your loan for up to three years without accruing interest during the postponement if you have a Direct Subsidized Loan, Subsidized Federal Stafford Loan, or Federal Perkins Loan. Other types of federal student loans are also eligible for deferment, but they continue to accrue interest during the deferment period. Deferment may be an option if you’re attending school at least half-time, if you’re unemployed, if you’re serving in the military, and under certain other conditions that make it difficult to pay your loan.
If you don’t qualify for a deferment, you may qualify for forbearance. It’s a temporary suspension or reduction in your student loan payments for up to 12 months because of a financial hardship or illness. Interest continues to accrue during forbearance and is added to your loan balance.
Discharge upon death or permanent disability
Federal student loans are discharged when the borrower dies. Parent PLUS loans may be discharged if the parent dies or if the student the loans were for dies.
Learn more: What happens to student loans when you die
Borrowers who become totally and permanently disabled will have their Direct Loan, Federal Family Education Loan, or Federal Perkins Loan forgiven.
Losing federal student loan benefits when refinancing with a private lender
“Borrowers who refinance federal student loans are not eligible for any of these benefits, so they really need to consider the trade-offs before refinancing,” said Andrew Josuweit, CEO of Student Loan Hero, a website that helps borrowers manage and pay off their student loans, in an interview.
“Borrowers should realize that they can pick and choose which student loans to refinance; they are never forced to refinance all of their student loans,” he said. “This means that they can choose to only refinance private student loans and leave federal student loans alone, or they can include some, but not all, federal student loans when refinancing."
Private refinancing: What’s available?
A variety of banks and financial institutions offer student loan consolidation and refinancing services. The range of services differs from firm to firm as well as the fees, interest rates, and loan terms they apply; but there some basics that most offer.
For example, SoFi, Earnest, and Purefy are low-rate student loan refinancing companies. Each allows borrowers to refinance both federal and private student loans as well as parent PLUS loans, all typically with no origination, application, or prepayment fees. Their repayment terms and interest rates vary in range, as do the size of the loans they will refinance. And, depending on the loan, they have different age and co-signer restrictions. Look at their websites for the latest information on their offerings.
Private student loan benefits
While you’ll lose all the borrower protections associated with federal student loans when you refinance with a private lender, some private lenders offer their own forms of assistance if you experience economic hardship.
Through its Unemployment Protection Program, SoFi will temporarily pause your payments for up to 12 months and help you find a new job if you become unemployed involuntarily. Earnest may allow you to defer your loan payments if you enter graduate school or the Peace Corps or serve in the military on active duty, and it may grant forbearance if you lose your job, your employer reduces your income or your essential expenses (such as medical bills) go up substantially. Purefy’s website states that if you lose your job or experience another extreme hardship such as a serious illness, death, or job loss, the company will consider your request for deferment or forbearance. Navy Federal Credit Union and Common Bond also say they offer temporary forbearance due to economic hardship.
With either deferment or forbearance through these private lenders, interest still accrues while you aren’t making payments, unlike with federal loans, which sometimes don’t accrue interest during a deferment.
Explore Your Options
There’s no guarantee that any lender will offer you better terms on your school loans than you have now, but it’s worth shopping around because you could save thousands. Make sure to compare not just your old and new monthly payments, but also your old and new lifetime borrowing costs, to see if you’ll come out ahead in the long run. That being said, sometimes you have to choose the option that’s cheapest in the short term because your cash flow is limited. If your financial situation improves later, you can always refinance again or make additional principal payments to get your loans repaid faster and reduce your total interest costs.
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1 Federal Reserve Bank of New York, “Household Debt Reaches New Peak,” press release, Sept. 2017.
2 Federal Reserve Bank of New York, “Student Loan Borrowing and Repayment Trends, 2015,” April 16, 2015.